The upcoming publication of the Consumer Price Index (CPI) is an important opportunity to address the social justice challenges created by soaring inflation. There is no typical American consumer, yet the basket of goods used to calculate the CPI makes this simplification – and it is to the detriment of the poor and the elderly.
The rich and the poor have very different baskets of goods that they buy each month. Right now, inflation is highest on the basket of goods bought by poor Americans. Basing the consumer price index on a basket of goods for a typical household is an outdated idea. We have the computational power and analytical ability to provide a much more robust inflation dashboard for policymakers so that they can properly understand the divergence of inflation experiences performed by a representative sample of the nation.
For a fair economy, the US government must build modern inflation indicators that allow policymakers and central bankers to better understand how inflation affects different demographic groups.
Should central bankers be more concerned with maintaining the purchasing power of the poor or the rich? It is a policy question that is never discussed, yet it is important. If central bankers were more concerned with maintaining the purchasing power of the poor, they might tighten earlier when inflation rises. Let’s take a closer look at the problem:
The United States Bureau of Labor Statistics openly states on its website that the Consumer Price Index “does not produce official estimates of the rate of inflation experienced by subgroups of the population, such as the the elderly or the poor “. In other words, the specific impact of inflation on poor and elderly Americans is not taken into account when the Federal Reserve, Congress, and the President make decisions about inflation policies. Yet the poor and the elderly are the most vulnerable to the impact of inflation on their purchasing power. This problem is magnified for low-income older and disabled Americans because the cost of living adjustment (COLA) used to adjust Social Security payments is tied to a basket of goods that does not reflect their experience as consumers.
This seemingly arid subject of calculating inflation indicators can have heart-wrenching consequences.
According to the United States Census Bureau, 37.2 million Americans live in poverty. And poverty in America is not without distinction of race or gender. The poverty rate for men is 10.2 percent, while the poverty rate for women is 12.6 percent. Particularly noteworthy, the poverty rate for a family headed by a woman is 23.4 percent, while the poverty rate for a family headed by a man is 11.4 percent. While 11.4 percent of the entire country lives in poverty, 8.2 percent of whites meet this definition, while 17 percent of Hispanics and 19 percent of blacks fall into this category. Sadly, 16% of all American children live in poverty. The poverty rate for people with disabilities is 25 percent.
So when inflation rises more for the basket of goods bought by the poor than for the basket of goods bought by the rich, the impact falls more on women, children, Hispanics, blacks and the disabled.
A closer look at the data reveals why it is time to take a new approach to accounting for inflation, inflation indicators and central bank policy formulation. A recent study from the University of Pennsylvania found that low-income families in the poorest 20% of U.S. households spend a substantially higher share of their income on food, energy, and shelter than families in high income (62.3% vs. 50.8%). They also spend much less on services (24.6% versus 30.8%) than the rich. As a result, in 2020, the poorest households saw their spending increase by 6.8%, while the richest 5% saw their spending increase by 6.1%.
These differences, while substantial, mask large variations in how inflation affected key budget categories of rich and poor.
The Bureau of Labor Statistics released its 2020 Consumer Spending Report just a few days ago. This level of detail, released a year after the fact, is not included in the monthly CPI data used by policymakers.
The report shows that the poorest 20 percent of U.S. households saw a 6.8 percent increase in shelter costs, while the richest 20 percent saw only a 0.9 increase. percent. Yet none of these differences will be discussed when the CPI is released for December 2021 on January 12. The data in the report does not provide this level of detail.
It’s time to start the important national conversation on social justice and inflation accounting.
Jonathan Lewis is President of Signatory Capital Advisors, a company that advises clients on the integration of environmental, social and governance policies.